Live by the Bellwether, Die by the Bellwether?

Mercenary Trader

Oct. 2, 2012, 9:32 AM

Has the Apple rollover become a market microcosm?

Apple is the most profitable and beloved public company in the world. Huge optimism built up in anticipation of the iPhone 5. There was even excited journalist chatter of how the iPhone alone could be a meaningful booster of US GDP.

Then we got the production shortages, the shortfall of stratospheric expectations for iPhone 5 sales, the concern of soft metal damage giving new phones the appearance of being scuffed, and the huge Apple maps flap (which managed to directly benefit GOOG).

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A common trader focus is the "hundred dollar roll," in which a stock that breaks a new century mark ($100, $200 etc.) is likely to keep going on the sheer power of momentum. (Not sure who came up with this, but the idea has been around since Jesse Livermore's day.)

AAPL's hundred dollar roll - at the princely level of $700 per share - was a total bust. The inability of AAPL to maintain 700 is now a psychological weight on the market.

So will this be a case of "live by the bellwether, die by the bellwether?" Will the flagging mojo in AAPL deflate the entire market?

Monday's action was certainly a huge disappointment for bulls. After a major run-up on surprisingly positive ISM data, the majors mostly gave it all back. Tech and small caps even managed to close red (thanks to the aforementioned AAPL)…

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Above we see ominous bearish flag patterns in four major vehicles: The S&P 500, small caps (via IWM), tech (via QQQ), and retail (XRT). Moving averages are not shown, but all four patterns would also represent a decline below 20 day exponential moving average support in the event of bear followthrough.

This is an extremely negative development (from a bullish perspective) coming as it does on the heels of Monday's reversal. The ISM news was unreservedly bullish - here is a Bloomberg recap if you missed it - and thus to see the majors (particularly the S&P) ramp so hard, and then turn tail, is a "tell" of meaningful underlying weakness.

S&P futures are modestly higher prior to Tuesday's market open, but it could be a red herring. We are aggressively adding to our roster of short setups today, in the event a bearish followthrough event turns into something substantial. To see our new pending trades - and our entire trading book, as established with real positions in real time - check out the Mercenary Live Feed!

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Aussie Aussie! One of our favorite macro trades this year, short AUDUSD, is gaining acceleration after an RBA rate cut.

Australia's dollar dropped against all of its 16 major peers after the country's central bank cut interest rates by 25 basis points today.

The so-called Aussie dropped to the lowest in more than three weeks against its U.S. counterpart after the Reserve Bank of Australia lowered its benchmark rate to 3.25 percent, the lowest level since 2009. Only nine of 28 economists surveyed by Bloomberg predicted the cut.

Meanwhile, in Europe, Spiegel is stirring the pot once again by wondering if the ECB Bond-Buying Program is Illegal. Via the Spiegel website:

The markets have celebrated Mario Draghi's announcement that the European Central Bank will embark on unlimited purchases of sovereign bonds from crisis stricken countries. But are such purchases really legal? Draghi's own justification for the program leaves plenty of room for doubt.

So Europe's crisis door might not be closed on that front either… wonderful…